- The Franchise Disclosure Document is an essential document to help you assess a franchisor’s finances.
- However, some franchisors are unable to fully disclose their financial information and projections to avoid misleading a potential franchisee.
- You can hire a franchise consultant, run a credit check and reach out to existing franchisees for a more thorough due diligence.
Like any major financial decision, it is crucial for potential franchisees to know what they are committing to before they sign on the dotted line. Getting information on what is expected of a franchisee, the commitments, the terms of the contract and most importantly, the financial details, is a must before jumping into any franchise agreement.
This background research is known as due diligence and ensures that potential franchisees have a realistic picture of the franchise they are buying into. However, reviewing the financial performance of a franchisor isn’t always an easy task because franchisors are often unable to disclose their full financial information to avoid making inaccurate representations to potential franchisees.
Understanding the Franchise Disclosure Document
A Franchise Disclosure Document (FDD) should cover all the key points that may influence a potential franchisee’s decision. From a financial perspective, this document can help highlight fees that may not have been previously considered, including required refurbishments, marketing levies, renewal and transfer fees.
Cashflow It Director Dan Toms stresses the importance of thoroughly analysing the information given, saying, “The FDD will tell you if there are any legal proceedings against the franchisor, the history of the directors and most importantly, it will tell you how many stores have ceased to trade, how many have been sold, how many have been bought back by the franchisor and it will list any previous and current franchisees and their contact details.”
This information alone doesn’t always provide the full picture. Hence, there are steps that a potential franchisee can take in order to find out more about the business before they buy such as doing their own market research or engaging with franchise professionals.
It is up to the franchisee to seek alternative sources of information that can help build a clearer picture about the true state of the business and the viability of the franchise. Although a franchisee may have to go through a credit check before buying a franchise, paying for a credit check on the franchisor can provide useful insight on whether they are keeping on top of their bills, which can often reflect their attitude towards how they manage their finances.
While many franchisors opt not to disclose any financial figures that would provide an indication of future earnings, they are required to provide their financials for the past two years or more or provide an independent audit that assures the business can pay their debts. This ensures that franchisees are not left completely in the dark.
Often though, nothing is as reliable as going straight to the source. Reaching out to existing franchisees can help you get a general idea of how happy they are with the performance of their franchise and how they view their relationship with the franchisor. These things can provide useful insights about whether the brand is a good cultural fit for you too. Some existing franchisees may even be willing to share some financial information with you to help you assess the franchise opportunity.
Many franchisees can be driven by their emotional attachment to the brand, which results in failing to invest enough time to conduct a thorough due diligence and struggling to take emotion out of the final decision. In this case, they should seriously consider hiring a franchise consultant or business advisor to help break down all the information contained in the FDD, ensuring that any decisions made are properly informed.
Whether it is your first time investing in a franchise, or you are expanding into your tenth site, getting a clear indication of a franchise’s financial performance can be a challenge. It is vital to do a comprehensive due diligence as part of the franchise purchase process to help prevent any buyer’s remorse down the line.
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